Cuba: A Giant Awakens

In
the midst of the emerging market upheaval at the end of 2014, a quirky headline
appeared on our screens. After fifty years of embargo and forced isolation, the
U.S. was normalizing relations with Cuba.

Few people took notice, or even cared. Volatility was destroying portfolios and
sending year-end bonuses up in smoke. The only reason why the event registered
on most trading desks was because it triggered a massive rally in Venezuelan
bond prices. For weeks, Venezuelan bonds had been in freefall, thanks to the
Saudi-induced massacre of the oil markets, and most traders were short.
However, the announcement fueled expectations that Cuba would soften its
militancy against the U.S. and remove its support for Venezuelan President Nicolas Maduro, thus leading to a
reversal in the country’s macroeconomic management. As a result, Venezuelan
bond prices flew.

THE BERLIN WALL OF LATIN AMERICA

Nevertheless, the end of Cuba’s isolation is a watershed moment. It is the
equivalent of the tearing down the Berlin Wall for Latin America. It heralds
the arrival of a sleeping giant to the marketplace. Last of all, it marks a
major shift in the geopolitical arrangement of the Western Hemisphere.

Cuba
is the largest country in the Caribbean, by population and land mass. With
almost 12 million inhabitants, it dwarfs most of Central America. Five decades
of Communism left it with the fourth highest literacy rate in Latin America. It
is ranked 11th in the world in doctors per capita. Five decades of
Communism also left it with almost no infrastructure. Transportation networks
are relics from the mid-1950s, as is the country’s electricity and
communications grid. Despite its shortcomings, its GDP is still a respectable
$70 billion.

Moreover, its geographic location is unenviable. Its deep water ports sit at
the center of the Caribbean basin, and a short distance from the entrance to
the Panama Canal, thus making it the perfect trans-shipment hub for much of the
Western Hemisphere. The combination of a skilled workforce, depressed wages,
vast natural resources and strategic location will convert Cuba into a magnet
for foreign investment. Hundreds of fund managers, industrialists and
entrepreneurs will soon deplane to look for new investment opportunities. At
the same time, thousands of exiled Cubans and lawyers will be trying to lay
claim to the properties and assets that were seized by the state. The result
will be a melee of privatizations, IPO’s and lawsuits.

ACTING PREEMPTIVELY

Unbeknownst to the common eye, there is a major geopolitical maneuver behind
the announcement. The Vatican may be crowing about its role in bringing the
disparate parties together, but the timing of the event was no coincidence. For
the Cubans, it occurred at the very moment they were going to be cut off from
the Venezuelan life support system. Fifteen years ago, Cuba was on verge of
collapse. The fall of the Soviet Union had severed its major source of assistance.
The ongoing U.S. sanctions kept them corralled. However, the ascendency of
Venezuelan President Hugo Chavez
provided them with a life line that not only allowed them to survive, but to
thrive. Unfortunately, things went wrong over the past year. The plunge in oil
prices, years of macroeconomic mismanagement and the death of Chavez forced
Caracas to begin trimning its international support programs, such as
PetroCaribe.

Therefore, instead of waiting until they were left in the lurch, Havana decided
to act preemptively. The timing for Washington was also impeccable. Wanting to
signal to the world that the deteriorating relationship with Russia was not a
revival of the Cold War, it decided to make amends with its ideological
arch-nemesis--Cuba. More importantly, it needs to cement its hegemonic grip
over the Western Hemisphere as the international system segues towards a
multipolar arrangement. By bringing Cuba into the fold, the U.S. has no major
ideological rival in the region. This is the first move in reversing years of
encroachment by the Chinese, and to a lesser extent Russians, in a region that
Washington considers to be its sole domain. It clearly marks a pivot towards
the Americas. With its huge population and treasure trove of natural resources,
Washington can now consolidate the region under its yoke.

The reincorporation of Cuba is a mortal blow for the leftist movements that
were sprouting throughout Latin America. Some of the more radical countries,
such as Bolivia, Paraguay and Ecuador, trimmed their ties with Havana several
years ago. Yet, Cuba still provided the intellectual fountain that nurtured the
political left in Chile, Argentina, Brazil and Venezuela. However, it has been
forced to put its own economic reality ahead of its ideological dialectic. As a
result, we are at a transformative moment in Latin American history and
development. Too bad, few people took notice.